The Supply Chain and Foreign Exchange: Be Afraid, Be Very Afraid (Part 2)

Click here for Part 1 of this post.

When it comes to currency concerns and the supply chain, there is no safe haven. A rising dollar makes global sourcing more expensive for US companies (and harms US exports). A falling euro represents a sign of far more dangerous structural concerns in the EU and whether a common currency can even survive. And of course, we have the RMB, the politburo's preferred means of buying and selling (and what ever rate they want to dictate on a given day). It's a true marvelous situation we find ourselves in, now isn't it? In terms of forecasting where markets might go, it's best to understand how folks are voting with their feet (and dollars, or whatever). A few recent posts over on Howe Street offer some insight as to where markets might be headed.

Consider, for example, that "a survey by Fitch Ratings showed that U.S. money-market funds reduced their lending to European banks by 20 percent from the end of May through July. The funds cut investments in Spanish and Italian lenders by 97 percent, to German firms by 42 percent and to French ones by 18 percent, Fitch said." The site then opines that the current bailouts happening on in the EU (over Greece) at least have a silver lining. To wit, "looking at the bright side of the Greek bailouts, they have at least bought everyone some time -- time to get out of the European financial system, that is."

Procurement and supply chain organizations can (and should) pay especially close attention to what's happening in the FOREX markets at the moment, as well as the leading indicators for what might come. Even though its treasury's role to hedge currency exposure (more on this in the next post in our analysis) the uncertainty in the markets and ultimate rise and fall after the current volatility dies down (a problem in and of itself, mind you), currency exchange rates can and should a material impact both on global sourcing decisions as well as demand forecast decisions. Yet given the stability of the RMB and other Asian currencies in recent years (and the short memory of the Asian currency rout going back a decade -- not to mention the belief in the Chinese economic supercycle), we've been lulled into a false sense of global sourcing and market expansion security. At Spend Matters, we believe that it's time for all of us to do away with the notion of currency and import/export stability -- if not growth -- and we must factor FOREX into our own forecasting and buying decisions.

Jason Busch

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